INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND HONDURAS Joint Bank-Fund Debt Sustainability Analysis - 2018 Update Prepared by the staffs of the International Development Association and the International Monetary Fund Approved by Paloma Anos-Casero (IDA) and Ana Corbacho (IMF) The debt sustainability analysis (DSA) shows some improvement relative to the previous review mainly due to better-than-expected outcomes in year 2017 and the revised profile of PPP operations.1 Staff still assess the risk of debt distress as moderate. Continued strengthening of institutions underpinning sound macroeconomic policies would be required for a future upgrade.2 1See Annex II of Honduras: Fifth and Sixth Reviews Under the Stand-By Arrangement-Press Release; Staff Report; and Statement by the Executive Director for Honduras (IMF Country Report No. 17/331). 2 This DSA has been prepared together by staffs of the IMF and the World Bank. BACKGROUND 1. Honduras’ public debt increased slightly in 2017. After satisfactory completion of the IMF-supported program (December 2017), gross public debt stood at 40¾ percent of GDP in 2017, an increase of about ¼ percentage point of GDP relative to 2016.3 In 2017, the NFPS posted a deficit of ¾ percent of GDP, and the sovereign placed international bonds for US$700 million at a historically low rate of 6¼ percent. 2. External debt increased in 2017. The increase in 2 percentage points of GDP (from 35½ percent of GDP in 2016 to 37½ percent of GDP in 2017) reflected the above-mentioned bond placement. The procedures from the placement were used to pay liabilities from the public electricity company ENEE. Consequently, the actual change in the stock of total external debt is larger than the implicit variation derived from identified debt-creating flows in the LIC-DSA template, thus causing a large residual in 2017. Total external debt figures are consistent with the standard BOP coverage including public banks and the monetary authority. 3. Public debt is mostly with foreign creditors. The share of public debt that is external rose from 72 percent in 2016 to about 77 percent in 2017 due mainly to the above- mentioned external bond issuance. The main external lenders to Honduras are the Inter- American Development Bank (IADB), the Central American Bank for Economic Integration (BCIE), and the World Bank. Debt to these institutions carries long maturities but only the IADB continues to provide loans on concessional terms (i.e., with a grant element of at least 35 percent). Domestic public debt is mainly with commercial banks, has a shorter—though rising—maturity (about 3 years), and carries a higher real interest rate. In March-2018, the authorities placed their first 15-year Lempira-denominated bond in the local market at a fixed interest rate of 11 percent. UNDERLYING ASSUMPTIONS 4. Economic growth. The baseline scenario assumes that growth will decelerate to 3¾ percent in 2018, owing to less favorable conditions abroad and uncertainty affecting private consumption and investment. Private consumption and public investment will be the main drivers of growth. Over the medium term, it is expected that growth will converge towards potential (3¾ percent), a similar outlook as envisaged in the previous DSA 5. Fiscal policy. As in the previous DSA and consistent with the fiscal responsibility law (FRL) we expect the fiscal outlook continued to be anchored by the FRL, which sets a NFPS deficit ceiling of 1 percent of GDP from 2019 onwards and a limit of about 3 percent in the real increase for current spending. Additionally, the DSA is aligned with the 3The NFPS public debt stock presented in this annex includes outstanding liabilities from the security trust fund (around ¼ percent of GDP). Additionally, the authorities adopted the IPSAS-32 standard for reporting PPP operations in the fiscal accounts; therefore, the net stock of liabilities stemming from PPPs is included as public debt stock (estimated at 1½ percent of GDP at end-2017). 2 authorities’ priority to control the increase in public debt stated in their revised macroeconomic framework. In the baseline scenario, the primary balance becomes consistently positive backed by fiscal reforms undertaken in 2013-2017. As part of these reforms, the gatekeeper role of the minister of finance has been strengthened with the requirement of a formal assessment on the size of fiscal liabilities (including contingencies) by the newly created contingency unit for all PPP operations. Thus far this new unit has resulted in a better prioritization of PPP projects. The baseline projection assumes that starting in 2021, the net flows from PPPs would be negative. 6. Fiscal institutions. Consolidating the role of the FRL as the cornerstone of macroeconomic policies continues to be the main challenge for the next years. On this front, the experience in Latin America with the adoption of a FRL is mixed. In some countries, a FRL failed to institutionalize fiscal prudence while in others it served to catalyze fiscal reforms and became the backbone of sound policy making. The implementation of the FRL in Honduras requires developing institutions, strengthening commitment, and fostering transparency and accountability across all levels of government. This process is off to a good start but it needs to be entrenched as a binding medium-term target. 7. Public sector financing. It is assumed that public financing will be contracted mainly from external sources. Financing conditions are expected to change toward less concessional terms compared to recent years (Table A3), including with multilateral institutions and external capital markets, and in line with Honduras increasing ability to tap international markets. Authorities have been targeting increased Lempiras-denominated debt issuance, with a longer maturity profile. Domestically, authorities target a minimum of 80% of the public debt portfolio be issued at fixed rates. 8. External sector. On the back of large remittances inflows, favorable terms of trade, and a recovery in coffee production, the current account deficit declined to 1¾ percent of GDP in 2017, its lowest level since 2001. The current account deficit is projected to hover around 4 percent over the medium term and stabilize at around 3½ percent of GDP over the longer term. Slower growth in remittances, coupled with less favorable terms of trade, explain the move toward higher deficits, which is in line with fundamentals and desired policy settings (see Annex I). As in the previous DSA, the current account deficit continues to be financed primarily by foreign direct investment and, to a lesser extent, public sector borrowing, with small private sector flows. This outcome allows for international reserves to remain around 5 months of non-maquila imports throughout the projection period. 3 Table AII.1. Selected Macroeconomic Indicators, Current vs. Previous DSA 2016 2017 2018 2019 Long term 1/ Real GDP growth (percent) Current DSA 3.8 4.8 3.7 3.7 3.8 Previous DSA 3.6 4.0 3.6 3.8 3.8 GDP deflator growth (percent) Current DSA 3.5 4.2 4.2 4.3 4.0 Previous DSA 3.7 5.9 3.8 4.0 4.4 Primary balance (% of GDP) Current DSA -0.7 -0.4 0.2 0.5 0.7 Previous DSA -0.3 -0.1 -0.2 0.4 0.5 Current account balance (% of GDP) Current DSA -2.7 -1.7 -3.8 -3.9 -3.5 Previous DSA -3.8 -4.1 -4.3 -4.0 -3.7 Net FDI (% of GDP) Current DSA 4.5 4.2 4.4 4.2 4.3 Previous DSA 4.5 5.7 6.1 6.0 6.4 Source: IMF staff estimates. 1/ Defined as the last 15 years of the projection period. For the current DSA, the long term covers the period 2024-38, whereas for the previous DSA it covered 2023-37. EXTERNAL DSA 9. PPG of external debt is expected to start decreasing in the medium term (Table AII.1). PPG external debt is projected to peak at about 33 percent of GDP in 2022, from about 31 percent of GDP in 2017. The share of PPG external debt in total public debt rises slowly to about 82 percent by 2022. The increase takes place as total debt decreases substantially due to fiscal consolidation. Private external debt is projected to be around 4 percent of GDP through the period. 10. External debt ratios remain within indicative thresholds in all scenarios.4 The ratios for the PV of PPG external debt and PPG debt service remain below their indicative thresholds in all scenarios throughout the projection period. PV of external PPG remains initially stable and starts to decline in 2023. 11. In the baseline scenario, debt indicators remain within indicative thresholds under the probability approach. All ratios remain within indicative thresholds under the baseline scenario (Figure AII.2). Under the most extreme shock (one-time 30 percent depreciation), the ratio for the PV of debt-to-GDP plus remittances ratio breaches the threshold in 2020 and only returns to levels below the threshold in the late 2026. The ratio of 4Honduras has large remittances inflows — about 18 percent of GDP on average in 2015-2017. Therefore, the indicative external DSA thresholds reported are remittances-adjusted as per the DSA template. 4 debt service to revenue is breached only in 2020 under the most extreme shock (a one-time 30 percent depreciation), reflecting the bullet payments of the 2013 bond issuance. 12. External debt indicators appear resilient to a customized scenario combining negative real, fiscal and financing shocks. The customized scenario aims at capturing possible downside risks and key vulnerabilities in Honduras. It includes negative shocks to GDP growth, which could arise from weaker external conditions; tighter external financing conditions that could be associated with negative developments in international financial markets; and a weaker fiscal position from possible slippages in the implementation of the fiscal responsibility law. In this scenario, the PV of PPG external debt-to-GDP plus remittances ratio rises initially up to 24 percent and starts to decline in 2023. The ratio of debt service-to-exports plus remittances and debt service to revenue also remain below their indicative thresholds throughout the projection. Table AII.2. Baseline vs. Customized Scenario 1/ 2018 2019 2020 Long term 2/ Real GDP growth (percent) Baseline 3.7 3.7 3.7 3.8 Customized 2.6 2.5 2.8 3.5 Average interest rate on new external debt Baseline 3.4 3.4 3.4 3.4 Customized 4.4 4.4 4.4 4.4 Fiscal balance Baseline -0.8 -0.8 -0.7 -0.7 Customized -2.8 -2.5 -2.2 -1.9 Source: IMF staff estimates. 1/ In the customized scenario, (i) real GDP growth is 2.5 percent in 2018 and 2.8 in 2019, and rises on average 0.25 percentage points per year to reach 3.5 percent in 2022, staying at this level for the remainder of the DSA period; (ii) financing conditions from external capital markets deteriorate permanently, raising the average interest rate on new external debt by 100 basis points; and (iii) the overall deficit increases by 2 percent of GDP in 2018 compared to the baseline and then fades out partially at a constant rate of 15 percent during the DSA period. 2/ Defined as the last 15 years of the projection period. For the current DSA, 2024-38. PUBLIC DSA 13. Public debt ratios are expected to peak in 2021 and then start to decline subsequently (Table AII.3). Public debt is projected to peak at about 41½ percent of GDP in 2021 (up from 40¾ percent of GDP in 2017) and start falling slowly as fiscal consolidation proceeds and interest payments decline reaching 30 percent of GDP by 2028. In present 5 value terms, the debt-to-GDP ratio is expected to peak at around 36¼ percent of GDP in 2021 and fall to about 25 percent of GDP by the late 2020s. Public debt dynamics remain somewhat vulnerable to both policy-related and exogenous shocks, especially to those related to economic growth and fiscal policy (Table AII.4). However, under no scenario the PV of debt-to-GDP ratio breaches its benchmark. 14. The exposure to contingent liabilities seems to be limited. Several measures recently taken by the authorities, including the creation of a special unit of fiscal risks, limit the exposure of public debt to fiscal risks. For instance, by doubling the contribution rate for the social security institute (IHSS), the authorities’ have improved the IHSS actuarial position; the PPP framework law was amended to limit the provision of government guarantees for PPP operations; and by upgrading PPPs accounting rules to international standards the impact of PPP’s operations is included into the regular spending or financing recording. The 2017 bond issuance was used to clear most of ENEE’s liabilities, leaving an estimated of 1¼ percent of GDP under dispute (classified as either as pending or contingent). CONCLUSION 15. Despite marked improvements on public and external debt indicators the risk of external debt distress remains moderate. Stronger than expected fiscal consolidation, and a reduced current account deficit strengthen the resilience of Honduras external position. The FRL passed in 2016 is a great achievement and sets the roadmap for continued structural fiscal reforms over the coming years. Against this backdrop, further revenue mobilization efforts and actions to ensure the sustainability of state-owned enterprises will be essential to guarantee fiscal sustainability. On the monetary front, the reform of the monetary policy framework has shown some progress but much more work is needed. Proper implementation of economic reforms and progress on the institutional front are critical to generate a track record of commitment to sound policies which would incline future risk assessments towards a low distress rating. 6 Table AII.1. Honduras: External Debt Sustainability Framework, Baseline Scenario, 2015-38 1/ (In percent of GDP, unless otherwise indicated) 6/ 6/ Actual Historical Standard Projections Average Deviation 2018-2023 2024-2038 2015 2016 2017 2018 2019 2020 2021 2022 2023 Average 2024 2025 2026 2027 2028 2038 Average External debt (nominal) 1/ 36.1 35.5 37.6 36.8 36.8 36.8 37.1 37.1 34.9 32.8 30.9 29.3 27.9 25.7 17.3 of which: public and publicly guaranteed (PPG) 28.8 29.0 31.2 31.5 32.4 32.5 32.8 32.9 30.7 28.6 26.8 25.2 23.8 21.6 13.4 Change in external debt -1.0 -0.6 2.1 -0.8 0.0 0.1 0.2 0.1 -2.3 -2.1 -1.8 -1.6 -1.4 -2.3 0.3 Identified net debt-creating flows -2.0 -2.5 -4.8 -1.7 -1.6 -1.6 -1.7 -1.8 -1.8 -1.9 -1.9 -1.9 -1.9 -1.9 -2.0 Non-interest current account deficit 3.6 1.4 0.4 5.8 4.2 2.5 2.6 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 Deficit in balance of goods and services 16.2 14.2 14.1 15.6 15.8 15.9 16.0 16.2 16.3 16.3 16.3 16.3 16.3 16.3 16.3 Exports 45.0 42.5 43.5 42.6 42.9 43.5 43.6 43.8 43.8 43.8 43.8 43.8 43.8 43.8 43.8 Imports 61.2 56.8 57.6 58.2 58.7 59.4 59.6 60.0 60.1 60.1 60.1 60.1 60.1 60.1 60.1 Net current transfers (negative = inflow) -18.3 -18.5 -19.6 -18.7 1.1 -19.2 -19.3 -19.3 -19.4 -19.6 -19.7 -19.7 -19.6 -19.6 -19.6 -19.6 -19.6 -19.6 of which: official -0.4 -0.2 -0.8 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7 Other current account flows (negative = net inflow) 5.7 5.7 5.8 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 Net FDI (negative = inflow) -4.5 -4.2 -4.4 -5.2 1.2 -4.2 -4.2 -4.2 -4.3 -4.3 -4.3 -4.3 -4.4 -4.4 -4.4 -4.5 -4.6 -4.5 Endogenous debt dynamics 2/ -1.1 0.2 -0.7 -0.1 0.0 0.0 -0.1 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.1 Contribution from nominal interest rate 1.1 1.3 1.3 1.3 1.3 1.3 1.2 1.2 1.1 1.1 1.0 1.0 0.9 0.8 0.5 Contribution from real GDP growth -1.3 -1.3 -1.6 -1.3 -1.3 -1.3 -1.3 -1.4 -1.4 -1.3 -1.2 -1.1 -1.1 -1.0 -0.6 Contribution from price and exchange rate changes -0.8 0.2 -0.5 … … … … … … … … … … … … Residual (3-4) 3/ 1.0 1.9 6.9 0.9 1.6 1.7 1.9 1.9 -0.4 -0.2 0.0 0.3 0.4 -0.3 2.3 of which: exceptional financing -0.1 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 PV of external debt 4/ ... ... 31.7 31.1 31.4 31.2 31.8 32.0 30.1 28.4 26.8 25.6 24.1 22.3 13.8 In percent of exports ... ... 72.9 73.2 73.3 71.7 73.0 73.0 68.8 64.9 61.3 58.4 55.1 50.9 31.4 PV of PPG external debt ... ... 25.4 25.9 27.0 26.9 27.6 27.7 25.9 24.2 22.7 21.5 20.0 18.2 9.9 In percent of exports ... ... 58.3 60.8 63.1 61.8 63.2 63.3 59.2 55.4 51.9 49.0 45.8 41.7 22.6 In percent of government revenues ... ... 80.8 84.1 89.3 88.8 91.1 92.1 85.8 80.2 75.1 71.0 66.3 60.3 32.8 Debt service-to-exports ratio (in percent) 20.5 30.7 15.7 16.2 14.5 17.3 12.3 13.6 13.3 13.1 13.4 11.3 16.1 11.1 9.7 PPG debt service-to-exports ratio (in percent) 3.5 4.1 4.5 4.8 4.9 9.5 4.6 6.0 5.9 5.7 6.1 4.1 9.0 4.0 3.0 PPG debt service-to-revenue ratio (in percent) 5.3 5.5 6.2 6.7 6.9 13.6 6.6 8.8 8.5 8.3 8.9 5.9 13.0 5.8 4.3 Total gross financing need (Billions of U.S. dollars) 2.1 2.6 0.9 1.6 1.4 1.8 1.2 1.4 1.5 1.5 1.6 1.4 2.2 1.5 2.0 Non-interest current account deficit that stabilizes debt ratio 4.5 2.0 -1.7 3.3 2.6 2.6 2.5 2.6 5.0 4.8 4.5 4.3 4.2 5.0 2.5 Key macroeconomic assumptions Real GDP growth (in percent) 3.8 3.8 4.8 3.2 2.0 3.7 3.7 3.7 3.7 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 GDP deflator in US dollar terms (change in percent) 2.3 -0.6 1.3 3.3 3.8 1.2 -0.7 -0.8 -0.3 0.2 0.7 0.1 1.2 1.5 1.5 1.5 1.5 1.5 1.4 Effective interest rate (percent) 5/ 3.2 3.7 4.0 2.7 0.8 3.5 3.6 3.7 3.3 3.4 3.2 3.4 3.2 3.2 3.3 3.2 3.1 3.3 3.3 Growth of exports of G&S (US dollar terms, in percent) 1.2 -2.4 8.5 5.1 13.2 2.7 3.7 4.5 3.6 4.6 4.6 3.9 5.1 5.4 5.4 5.4 5.4 5.4 5.4 Growth of imports of G&S (US dollar terms, in percent) 0.8 -4.2 7.6 4.0 15.3 6.1 3.8 4.2 3.8 4.7 4.8 4.5 5.1 5.4 5.4 5.4 5.4 5.4 5.4 Grant element of new public sector borrowing (in percent) ... ... ... ... ... 16.5 15.0 14.9 15.3 14.3 15.6 15.3 17.7 17.7 17.7 15.2 17.7 17.1 17.5 Government revenues (excluding grants, in percent of GDP) 30.1 31.6 31.4 30.8 30.3 30.3 30.3 30.1 30.2 30.2 30.2 30.2 30.2 30.2 30.2 30.2 Aid flows (in Billions of US dollars) 7/ 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.2 0.4 of which: Grants 0.2 0.2 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.4 of which: Concessional loans 0.1 0.1 0.1 0.0 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Grant-equivalent financing (in percent of GDP) 8/ ... ... ... 1.0 1.1 1.2 1.1 1.1 0.8 0.8 0.9 0.8 1.1 0.6 0.7 0.8 Grant-equivalent financing (in percent of external financing) 8/ ... ... ... 34.2 29.2 26.5 30.6 28.4 50.4 47.6 41.9 54.8 29.8 94.0 83.4 53.2 Memorandum items: Nominal GDP (Billions of US dollars) 21.0 21.6 23.0 24.1 24.8 25.5 26.4 27.5 28.8 30.2 31.8 33.6 35.4 37.3 62.8 Nominal dollar GDP growth 6.2 3.2 6.2 4.9 2.9 2.9 3.4 4.1 4.6 3.8 5.1 5.4 5.4 5.4 5.4 5.4 5.4 PV of PPG external debt (in Billions of US dollars) 5.8 6.1 6.6 6.7 7.1 7.5 7.3 7.2 7.1 7.1 7.0 6.7 6.2 (PVt-PVt-1)/GDPt-1 (in percent) 1.2 1.9 0.6 1.7 1.4 -0.5 1.0 -0.4 -0.3 -0.1 -0.3 -0.8 -0.7 -0.2 Gross workers' remittances (Billions of US dollars) 3.7 3.8 4.3 4.5 4.6 4.8 5.0 5.2 5.5 5.7 6.0 6.4 6.7 7.1 11.9 PV of PPG external debt (in percent of GDP + remittances) ... ... 21.4 21.8 22.8 22.6 23.2 23.3 21.8 20.4 19.1 18.0 16.8 15.3 8.3 PV of PPG external debt (in percent of exports + remittances) ... ... 40.8 42.3 44.0 43.2 44.2 44.2 41.3 38.6 36.2 34.2 31.9 29.1 15.8 Debt service of PPG external debt (in percent of exports + remittances) ... ... 3.1 3.4 3.4 6.6 3.2 4.2 4.1 4.0 4.3 2.8 6.3 2.8 2.1 Sources: Country authorities; and staff estimates and projections. 0 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Assumes that PV of private sector debt is equivalent to its face value. 5/ Current-year interest payments divided by previous period debt stock. 6/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. 7/ Defined as grants, concessional loans, and debt relief. 8/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7 Table AII.2. Honduras: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018-38 (In percent) Projections 2018 2019 2020 2021 2022 2023 2028 2038 PV of debt-to-GDP+remittances ratio Baseline 22 23 23 23 23 22 15 8 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 22 24 24 26 27 26 26 27 A2. New public sector loans on less favorable terms in 2017-2037 2/ 22 23 23 24 25 24 19 13 A3. Customized 7/ 21 23 24 25 26 25 17 4 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 22 23 23 24 24 22 16 8 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 22 25 32 32 33 31 23 11 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 22 22 22 22 23 21 15 8 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 22 24 25 25 26 24 17 9 B5. Combination of B1-B4 using one-half standard deviation shocks 22 24 26 27 27 25 18 9 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 22 30 30 30 31 29 20 11 PV of debt-to-exports+remittances ratio Baseline 42 44 43 44 44 41 29 16 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 42 46 47 50 52 51 50 54 A2. New public sector loans on less favorable terms in 2017-2037 2/ 42 44 45 47 48 45 35 25 A3. Customized 7/ 50 54 55 57 59 56 39 10 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 42 43 42 43 43 41 28 15 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 42 53 71 72 72 69 51 24 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 42 43 42 43 43 41 28 15 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 42 47 49 48 49 46 33 17 B5. Combination of B1-B4 using one-half standard deviation shocks 42 48 55 56 56 53 38 19 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 42 43 42 43 43 41 28 15 PV of debt-to-revenue ratio Baseline 84 89 89 91 92 86 60 33 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 84 92 94 99 103 101 97 100 A2. New public sector loans on less favorable terms in 2017-2037 2/ 84 89 92 96 99 94 74 53 A3. Customized 7/ 82 77 79 83 85 81 57 14 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 84 89 91 93 95 88 62 34 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 84 100 124 127 129 122 91 43 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 84 87 85 88 89 83 58 32 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 84 92 97 100 101 95 68 35 B5. Combination of B1-B4 using one-half standard deviation shocks 84 92 101 104 105 99 72 36 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 84 125 124 128 129 121 85 46 8 Table AII.2. Honduras: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018-38 (continued) (In percent) Projections 2018 2019 2020 2021 2022 2023 2028 2038 Debt service-to-exports+remittances ratio Baseline 3 3 7 3 4 4 3 2 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 3 3 6 3 4 4 4 5 A2. New public sector loans on less favorable terms in 2017-2037 2/ 3 3 6 3 4 4 4 3 A3. Customized 7/ 4 4 8 4 5 5 4 2 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 3 3 7 3 4 4 3 2 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 3 4 8 5 6 6 5 4 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 3 3 7 3 4 4 3 2 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 3 4 7 3 4 4 3 2 B5. Combination of B1-B4 using one-half standard deviation shocks 3 4 7 4 5 5 4 3 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 3 3 7 3 4 4 3 2 Debt service-to-revenue ratio Baseline 7 7 14 7 9 8 6 4 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 7 7 13 6 8 8 7 9 A2. New public sector loans on less favorable terms in 2017-2037 2/ 7 7 13 7 9 9 7 6 A3. Customized 7/ 7 7 14 7 9 9 7 4 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 7 7 14 7 9 9 6 4 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 7 7 14 8 10 10 9 6 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 7 7 13 7 9 8 6 4 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 7 7 14 7 9 9 7 5 B5. Combination of B1-B4 using one-half standard deviation shocks 7 7 14 7 9 9 7 5 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 7 10 20 9 13 12 8 6 Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline) 6/ 15 15 15 15 15 15 15 15 Sources: Country authorities; and staff estimates and projections. 1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline. 3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels). 4/ Includes official and private transfers and FDI. 5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent. 6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2. 7/ In the customized scenario, (i) real GDP growth is 2.6 percent in 2016 and 2.5 in 2017, and rises on average 0.25 percentage points per year to reach 3.5 percent in 2021, staying at this level for the remainder of the DSA period; (ii) financing conditions from external capital markets deteriorate permanently, raising the average interest rate on new external debt by 100 basis points; and (iii) the overall deficit of the CPS increases by 2 percent of GDP in 2015 compared to the baseline and then fades out partially at a constant rate of 15 percent during the DSA period. 9 Figure AII.1. Honduras: Indicators of Public and Publicly Guaranteed External Debt 1/ a. Debt Accumulation b.PV of debt-to-GDP+remittances ratio 3 20 40 18 2 35 16 2 14 30 1 12 25 10 1 8 20 0 6 15 4 -1 10 2 -1 0 5 2018 2023 2028 2033 2038 0 Rate of Debt Accumulation 2018 2023 2028 2033 2038 Grant-equivalent financing (% of GDP) Grant element of new borrowing (% right scale) c.PV of debt-to-exports+remittances ratio d.PV of debt-to-revenue ratio 140 300 120 250 100 200 80 150 60 100 40 20 50 0 0 2018 2023 2028 2033 2038 2018 2023 2028 2033 2038 e.Debt service-to-exports+remittances ratio f.Debt service-to-revenue ratio 18 30 16 25 14 12 20 10 15 8 6 10 4 5 2 0 0 2018 2023 2028 2033 2038 2018 2023 2028 2033 2038 Baseline Historical scenario Most extreme shock 1/ Threshold Customized scenario 2/ Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio on or before 2028. In figure b. it corresponds to a Exports shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock 2/ In the customized scenario, (i) real GDP growth is 2.5 percent in 2018 and 2.8 in 2019, and rises on average 0.25 percentage points per year to reach 3.5 percent in 2022, staying at this level for the remainder of the DSA period; (ii) financing conditions from external capital markets deteriorate permanently, raising the average interest rate on new external debt by 100 basis points; and (iii) the overall deficit of the CPS increases by 2 percent of GDP in 2018 compared to the baseline and then fades out partially at a constant rate of 15 percent during the DSA period. 10 Figure AII.2. Honduras: Probability of Debt Distress of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2018-38 1/ a. Debt Accumulation b.PV of debt-to-GDP+remittances ratio 3 20 16 18 2 14 16 2 14 12 1 12 10 10 1 8 8 0 6 6 4 -1 4 2 -1 0 2 2018 2023 2028 2033 2038 0 Rate of Debt Accumulation 2018 2023 2028 2033 2038 Grant-equivalent financing (% of GDP) Grant element of new borrowing (% right scale) c.PV of debt-to-exports+remittances ratio d.PV of debt-to-revenue ratio 14 16 12 14 12 10 10 8 8 6 6 4 4 2 2 0 0 2018 2023 2028 2033 2038 2018 2023 2028 2033 2038 e.Debt service-to-exports+remittances ratio f.Debt service-to-revenue ratio 16 18 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 2018 2023 2028 2033 2038 2018 2023 2028 2033 2038 Baseline Historical scenario Most extreme shock 1/ Threshold Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio on or before 2028. In figure b. it corresponds to a Exports shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock 11 Table AII.3. Honduras: Public Sector Debt Sustainability Framework, Baseline Scenario, 2015-38 (In percent of GDP, unless otherwise indicated) hide hide hide hide Actual Estimate Projections 5/ 5/ Standard 2018-23 Average 2024-38 Average 2015 2016 2017 Deviation 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Average 2028 2038 Public sector debt 1/ 39.6 40.5 40.8 41.3 41.7 41.5 41.5 39.9 38.2 36.5 34.7 33.1 31.5 30.0 18.2 of which: foreign-currency denominated 28.1 28.6 31.0 31.5 32.4 32.5 32.8 32.9 30.7 28.6 26.8 25.2 23.8 21.6 13.4 Change in public sector debt 0.7 0.9 0.3 0.5 0.3 -0.1 0.0 -1.6 -1.7 -1.7 -1.7 -1.6 -1.6 -1.6 -1.0 Identified debt-creating flows 0.6 2.5 -0.3 0.8 0.6 0.5 0.1 -0.1 -0.2 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 Primary deficit 2/ 0.5 0.7 0.4 3.1 2.2 -0.2 -0.5 -0.7 -0.6 -0.5 -0.6 -0.6 -0.7 -0.7 -0.7 -0.5 -0.7 -0.7 -0.7 Revenue and grants 29.8 30.5 30.5 29.9 29.5 29.5 29.6 29.5 29.7 29.7 29.8 29.8 29.9 29.9 30.4 of which: grants 0.9 0.8 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 Primary (noninterest) expenditure 30.3 31.2 30.9 29.7 29.0 28.9 29.0 29.0 29.1 29.2 29.1 29.1 29.2 29.2 29.7 Automatic debt dynamics -0.5 1.4 -0.9 0.9 1.1 1.2 0.7 0.4 0.4 0.3 0.4 0.5 0.5 0.4 0.5 Contribution from interest rate/growth differential -0.1 0.6 -0.3 0.1 0.2 0.2 0.1 0.0 0.1 0.2 0.3 0.3 0.3 0.3 0.4 of which: contribution from average real interest rate 1.4 2.0 1.5 1.6 1.7 1.7 1.6 1.5 1.5 1.6 1.6 1.6 1.6 1.5 1.1 of which: contribution from real GDP growth -1.4 -1.4 -1.9 -1.5 -1.5 -1.5 -1.5 -1.5 -1.5 -1.4 -1.4 -1.3 -1.2 -1.2 -0.7 Contribution from real exchange rate depreciation -0.5 0.8 -0.6 0.8 0.9 0.9 0.6 0.5 0.3 0.1 0.1 0.1 0.1 ... ... Other identified debt-creating flows 0.7 0.4 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Privatization receipts (negative) 0.7 0.4 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other (specify, e.g. bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Residual, including asset changes 0.0 -1.6 0.6 -0.2 -0.2 -0.7 -0.1 -1.5 -1.5 -1.5 -1.4 -1.4 -1.3 -1.3 -0.8 Other Sustainability Indicators PV of public sector debt ... ... 35.0 35.7 36.3 35.9 36.3 34.8 33.5 32.1 30.6 29.3 27.7 26.6 14.7 of which: foreign-currency denominated ... ... 25.2 25.9 27.0 26.9 27.6 27.7 25.9 24.2 22.7 21.5 20.0 18.2 9.9 of which: external ... ... 25.4 25.9 27.0 26.9 27.6 27.7 25.9 24.2 22.7 21.5 20.0 18.2 9.9 PV of contingent liabilities (not included in public sector debt) ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... Gross financing need 3/ 3.7 3.1 6.9 3.4 3.8 5.9 3.9 4.1 4.2 4.3 4.5 3.6 5.8 3.8 2.5 PV of public sector debt-to-revenue and grants ratio (in percent) … … 114.6 119.3 122.9 121.4 122.7 117.8 112.7 108.1 102.9 98.3 92.8 88.8 48.3 PV of public sector debt-to-revenue ratio (in percent) … … 117.0 121.9 125.7 124.1 125.3 120.2 115.1 110.4 105.1 100.5 94.8 90.7 49.4 of which: external 4/ … … 84.9 88.4 93.7 93.0 95.1 95.9 89.2 83.4 77.9 73.6 68.6 62.3 33.3 Debt service-to-revenue and grants ratio (in percent) 5/ 17.2 13.4 25.0 16.1 18.7 25.7 18.8 19.1 19.2 19.6 20.4 17.5 24.2 17.6 12.1 Debt service-to-revenue ratio (in percent) 6/ 17.7 13.7 25.5 16.4 19.1 26.3 19.2 19.5 19.6 20.0 20.9 17.8 24.7 18.0 12.4 Primary deficit that stabilizes the debt-to-GDP ratio -0.1 -0.2 0.1 -0.7 -0.9 -0.5 -0.6 1.1 1.1 1.2 1.0 0.9 0.9 0.9 0.3 Key macroeconomic and fiscal assumptions Real GDP growth (in percent) 3.8 3.8 4.8 3.2 2.0 3.7 3.7 3.7 3.7 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 Average nominal interest rate on forex debt (in percent) 3.6 3.4 4.0 2.6 0.8 3.4 3.5 3.6 3.2 3.3 3.1 3.1 3.1 3.2 3.1 3.4 3.0 3.1 3.1 Average real interest rate on domestic debt (in percent) 6.6 12.8 8.1 7.2 4.0 11.8 13.5 14.4 14.1 12.9 17.1 17.1 17.1 17.0 17.0 14.0 16.9 16.5 16.8 Inflation rate (GDP deflator, in percent) 6.9 3.5 4.2 5.4 2.3 4.2 4.3 4.1 4.1 4.0 4.0 4.0 4.0 4.0 4.0 4.1 4.0 4.0 4.0 Growth of real primary spending (deflated by GDP deflator, in percent) -5.7 6.9 3.9 0.6 3.2 -0.3 1.0 3.4 4.1 3.9 4.4 3.9 3.5 4.0 4.0 2.7 4.0 4.1 4.0 Grant element of new external borrowing (in percent) ... ... ... … … 16.5 15.0 14.9 15.3 14.3 15.6 17.7 17.7 17.7 15.2 15.3 17.7 17.1 17.5 Sources: Country authorities; and staff estimates and projections. 1/ Gross debt of the Combined Public Sector 2/ As defined in the fiscal accounts 3/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period. 4/ Revenues excluding grants. 5/ Debt service is defined as the sum of interest and amortization of medium and long-term debt. 6/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. 12 Table AII.4. Honduras: Sensitivity Analysis for Key Indicators of Public Debt 2018-38 Projections 2018 2019 2020 2021 2022 2023 2028 2038 PV of Debt-to-GDP Ratio Baseline 36 36 36 36 35 33 27 15 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 36 39 43 47 49 51 62 87 A2. Primary balance is unchanged from 2018 36 35 34 33 31 29 19 5 A3. Permanently lower GDP growth 1/ 36 36 36 37 36 36 36 46 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2019-2020 36 38 39 41 41 41 41 44 B2. Primary balance is at historical average minus one standard deviations in 2019-2020 36 41 46 47 45 44 38 29 B3. Combination of B1-B2 using one half standard deviation shocks 36 41 45 47 46 45 43 40 B4. One-time 30 percent real depreciation in 2019 36 48 48 48 47 46 41 33 B5. 10 percent of GDP increase in other debt-creating flows in 2019 36 45 45 45 43 42 36 27 PV of Debt-to-Revenue Ratio 2/ Baseline 114 117 116 118 113 108 86 48 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 114 134 144 157 164 171 208 285 A2. Primary balance is unchanged from 2018 114 119 114 113 105 97 65 17 A3. Permanently lower GDP growth 1/ 114 123 123 126 123 121 119 150 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2019-2020 114 128 133 139 139 138 138 145 B2. Primary balance is at historical average minus one standard deviations in 2019-2020 114 140 157 157 152 147 126 94 B3. Combination of B1-B2 using one half standard deviation shocks 114 138 154 157 155 152 143 133 B4. One-time 30 percent real depreciation in 2019 114 164 162 164 159 155 136 108 B5. 10 percent of GDP increase in other debt-creating flows in 2019 114 152 151 152 147 142 121 90 Debt Service-to-Revenue Ratio 2/ Baseline 16 19 26 19 19 19 18 12 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 16 20 28 26 27 29 33 42 A2. Primary balance is unchanged from 2018 16 20 27 20 20 20 19 12 A3. Permanently lower GDP growth 1/ 16 20 27 22 22 23 24 27 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2019-2020 16 20 29 23 24 25 26 26 B2. Primary balance is at historical average minus one standard deviations in 2019-2020 16 20 28 28 28 25 24 21 B3. Combination of B1-B2 using one half standard deviation shocks 16 20 29 27 28 26 26 25 B4. One-time 30 percent real depreciation in 2019 16 21 34 25 28 28 27 25 B5. 10 percent of GDP increase in other debt-creating flows in 2019 16 20 29 31 23 26 24 20 Sources: Country authorities; and staff estimates and projections. 1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period. 2/ Revenues are defined inclusive of grants. 13 Figure AII.3. Honduras: Indicators of Public Debt under Alternative Scenarios, Most extreme 2018-38 1/ shock One-time depreciation Baseline Fix Primary Balance Most extreme shock 1/ Historical scenario Public debt benchmark 100 90 PV of Debt-to-GDP Ratio 80 70 60 50 40 30 20 10 0 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 300 PV of Debt-to-Revenue Ratio 2/ 250 200 150 100 50 0 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 45 Debt Service-to-Revenue Ratio 2/ 40 35 30 25 20 15 10 5 0 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio on or before 2028. 2/ Revenues are defined inclusive of grants. 14